Argentine Bonds Fall on Government Proposal to Default Holdouts

By Katia Porzecanski and Bob Van Voris -
Apr 1, 2013

Argentina’s dollar-denominated debt
dropped on speculation the government’s offer to pay defaulted
debtholders on similar terms as past restructurings will spur a
U.S. court to order the nation to pay in full.

The government’s restructured notes due 2033 fell 1.09
cents to 52.66 cents on the dollar at 3:30 p.m. in New York
after earlier declining to 51.76 cents, according to data
compiled by Bloomberg. The yield on the bonds jumped 33 basis
points, or 0.33 percentage point, to 16.81 percent, the highest
level on a closing basis since June 2009.

Concern is mounting that an appeals court order forcing
Argentina to pay hedge fund Elliott Management Corp. and other
holdout creditors in full would prompt the country to halt
payments on the notes from the 2005 and 2010 restructurings. An
attorney for Argentina told the appeals court in February that
the nation wouldn’t obey a lower court order to pay the holdouts
the full amount, which totals more than $1 billion. The lower
court order forbids Argentina from servicing the restructured
bonds without paying the holdout creditors, meaning an upholding
of the full payment ruling could trigger a new default.

“The Argentines made no compromises” in their new payment
offer, said Eric Fine, who helps oversee about $5 billion of
emerging-market assets at Van Eck Global in New York. They are
“playing for either delay or confrontation, neither of which is
positive.”

‘Carbon Copy’

The South American nation filed its payment proposal on
March 29, an hour before a deadline, in a bid to get the appeals
court to strike down the lower court’s payment order. Economy
Minister Hernan Lorenzino told reporters March 30 in Buenos
Aires that the offer satisfies the request of the court to treat
bondholders equally.

“The proposal could be characterized as a simple ‘carbon
copy’ of the 2010 restructuring offer,” Vladimir Werning, an
economist at JPMorgan Chase & Co., wrote in a note to clients.
“We do not anticipate the judges to support the ‘cram down’
being requested by Argentina.”

Argentine bonds rallied 2.3 percent on March 28 on
speculation President Cristina Fernandez de Kirchner would make
an improved offer to holdouts that included past-due interest on
the defaulted bonds. In the country’s 2010 restructuring,
investors’ eligible claims were limited to principal and
interest accrued on the defaulted securities until the end of
2001. The government halted payments on $95 billion of bonds
late that year, marking a record sovereign default.

‘Argentina’s Defiance’

The conditions of the 2010 offer were repeated in the
country’s filing March 29. In a 22-page letter, it proposed two
possibilities for creditors to exchange their defaulted debt for
new bonds and said the market value of its so-called discount
option for NML Capital Ltd., a unit of Elliott, would be $120.6
million. That compares with an estimated value of $720 million
under the lower court’s payment formula, the government said.

“This highlights the degree of Argentina’s defiance,”
Joshua Rosner, an analyst at Graham Fisher & Co., said in an e-
mailed note.

Under Argentina’s proposal, a so-called par option, which
is intended for smaller investors, would give bondholders new
bonds due in 2038 with a nominal face amount equal to the amount
of their defaulted debt, plus unpaid interest up to the end of
2001. The par bonds would pay interest that rises from 2.5
percent to 5.25 percent a year over the life of the bonds. They
would also receive a one-time cash payment to compensate for
past-due interest on the restructured bonds, according to the
letter.

GDP Warrants

The discount option would give holdouts bonds due in 2033
for a portion of the defaulted amount, with an 8.28 percent
annual rate and an increase in principal over time. Creditors
would be compensated for past due interest on the restructured
bonds with new bonds due in 2017 that pay 8.75 percent annually,
according to the letter.

Both options would be supplemented with securities tied to
Argentina’s economic growth, which make payments to investors
when the economy expands about 3 percent a year, the government
said. Argentina’s growth slowed to 2 percent last year from 8.9
percent in 2011. The warrants fell 0.13 cent today to 5.27 cents
on the dollar.

A decision forcing Argentina to pay the defaulted
bondholders immediately would expose it to $43 billion in
additional claims it can’t pay and trigger a new default, the
government has said.

‘Political Concerns’

While Argentina could file an appeal of any adverse ruling
by the three-judge appellate panel to a larger number of judges,
or the U.S. Supreme Court, contract issues in the case were
based on New York state law.

Fernandez has vowed never to pay the hedge funds that hold
the debt, which her government calls “vulture” investors.

“In the end, the ultimate decision makers probably
assessed their probabilities of success and ended up
prioritizing domestic political concerns,” Jeff Williams, a
strategist at Citigroup Inc., wrote today in a report.

The holdout creditors are seeking to buttress rulings by
U.S. District Judge Thomas Griesa in Manhattan, who has presided
over the case for a decade. Griesa has ruled that Argentina must
pay holdouts the full amount they’re owed whenever it makes a
required payment to the holders of the restructured bonds.

The government’s next scheduled payments include
$161 million in interest on April 4 for bonds due 2038 and
$42 million on June 2 for bonds due 2017, according to Bank of
America Corp.

The lower court case is NML Capital Ltd. v. Republic of
Argentina, 08-06978, U.S. District Court, Southern District of
New York (Manhattan). The appeal is NML Capital Ltd. v. Republic
of Argentina, 12-00105, U.S. Court of Appeals for the Second
Circuit (New York).